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The U.S. Foreign-Trade Zones Program Helps U.S. Industry Compete

28 Sep, 2021

By: Greg Jones
If you examine the home page of the U.S. Foreign-Trade Zones Board website, you will see the following as a goal: “Encouraging activity and investment in the U.S.”  This is more than a statement of aspiration or a statement of purpose. It is a statement of historical fact. 
 
Since the 1980s, the U.S. Foreign-Trade Zones program has helped companies in many strategically important industries answer the challenges of international competition. In doing so, the program has also contributed to the economic health of Am

erican communities and local workforces that depend on a solid manufacturing base to maintain an environment of opportunity and diversity. 

 
For years, the use of the U.S. FTZ program by manufacturing and production operations has steadily grown thanks to the array of benefits it offers. As supply chains have become more global, and as global and regional trade agreements have changed the tariff structures within which U.S.-based manufacturers operate, the FTZ program has become of strategic importance in several key industries. Some of the more important benefits include:
 
Duty avoidance on re-exports. Goods stored in Zones may be shipped to foreign  markets without payment of U.S. customs duties. The same benefit applies for exports of goods manufactured in Zones that are exported to non-USMCA countries.
Relief from irrational duty rate relationships. (Sometimes referred to as “inverted tariffs.”) This benefit has been of particular importance in motivating companies in a succession of key industries to use the FTZ program to enhance their bottom lines.
Lower supply chain costs. FTZ Direct Delivery procedures reduce the time between unlading at a U.S. port and the arrival of parts and components to the FTZ user. FTZ Weekly Entry procedures reduce the paperwork involved in serving the domestic market from the Zone operation.
Zone-to-zone transfers. A vendor located at one FTZ may sell goods to a buyer in another Zone or Subzone anywhere in the U.S. and transfer those goods to the buyer’s FTZ with no duty paid on the goods. Thus, the vendor located in one FTZ can price sales to the buyer located in another FTZ based on a cost that excludes duty. As a result, the buyer obtains a discount from the vendor and takes further advantage of FTZ cost-saving strategies. 
Customs duty deferral. No customs duties are paid while imported material remains in the Zone.
 
Next, we’ll examine a few key American industries that have used the U.S. FTZ program to maintain their international competitiveness.
 
Automotive Industry
The U.S. automotive industry was the first strategically important industry to make wholesale use of the FTZ program. In the 1980s, the industry was under keen competitive pressure from abroad. Even with various measures aimed at stemming the flow of foreign-made automobiles into the U.S. (such as voluntary restraint agreements), foreign production of finished passenger vehicles enjoyed an inherent bottom-line advantage because of the U.S. tariff structure at the time. 
 
In the 1980s, a finished automobile imported into the U.S. was subject to a customs duty rate of 2.5 percent. Yet a number of key components which might be imported for the purpose of manufacturing an automobile in the U.S. such as axle assemblies or carburetors were subject to duty rates of 3.5 percent. 
 
This “inverted tariff” structure, which impinged upon the day-to-day operating margins of companies producing automobiles in the United States, impelled several major automakers into the U.S. FTZ program. The FTZ program enabled U.S.-based manufacturers to level the playing field by authorizing them to pay a 2.5 percent duty rate on foreign components incorporated into finished vehicles made in the U.S.
 
The mechanism that made this achievable on a large scale was the ability afforded to local community FTZ “grantee” organizations to have local automotive plants designated as “subzones” of their existing zone projects. This meant that the local FTZ project could be expanded to include the local manufacturing facility without the cost and disruption that would otherwise occur had the manufacturing facility been required to migrate to a previously existing FTZ site.
 
1995 saw the implementation of the Uruguay Round Agreements which featured an array of sector-specific targeted tariff rate reductions. These tariff rate reductions included reductions in U.S. duty rates applicable to major automotive components to the duty rate that applied to finished automobiles: 2.5 percent.
 
While these reductions solved the inverted tariff problem that had served as a disincentive to producing finished automobiles in the U.S., they also shifted the phenomenon of inverted tariff rate relationships to the automotive parts sector. Consequently, many finished-automobile plants discontinued their use of the FTZ program, while more automobile parts producers began to use the program. At the same time, more international nameplates subsequently established and/or grew their U.S.-based production capabilities for both finished automobiles and parts.
 
Between 1995 and 2020, receipts of auto parts used in FTZ production grew from $7.4 billion to more than $13 billion, with Zone-related automobile and auto parts production occurring in more than 20 states, including Alabama, California, Georgia, Indiana, Kentucky, Michigan, Mississippi, Ohio, South Carolina, Texas, and Tennessee, according to the 57th Annual Report of the Foreign-Trade Zones Board to the Congress of the United States.
 
Energy Production Industry
Use of the FTZ program in the energy production industry perhaps best exemplifies the way in which the FTZ program meets the evolving strategic needs of the U.S. economy. The 1990s saw the wholesale entry into the FTZ program by the U.S. oil refining industry. In contrast to the few independent refineries on the Texas Gulf Coast that used FTZs in the 1980s, the bigger refining companies enthusiastically embraced the FTZ program during the 1990s. 
 
Today, oil refineries use the FTZ program to obtain relief from the inverted tariff rate relationships between crude oil and various petrochemical byproducts used to produce other strategically important materials such as rubbers, resins, synthetic fibers, and ingredients used to produce pharmaceutical products.
 
According to the FTZ Board 2020 Annual Report to Congress, FTZ refinery operations are active in more than a half dozen states, including California, Delaware, Louisiana, Mississippi, and Texas.
 
As the U.S. began to focus more intently on establishing energy independence, companies with products aimed at facilitating U.S.-based energy exploration and production found that the U.S. FTZ program could help them better compete with their foreign counterparts. These companies include Aker Solutions in Alabama, Houston-based M-I, LLC and Halliburton, which has facilities in Louisiana and Texas that produce equipment and materials to make energy exploration more efficient and environmentally safer.
 
Pharmaceutical Industry
For more than a half a century, the importance of pharmaceutical products in advancing the ability of medical technology to increase life expectancy has been readily apparent. The value of pharmacological solutions has become even more apparent during the recent global COVID-19 pandemic.
 
With the worldwide implementation of the Uruguay Round tariff structure in 1995, almost all pharmaceutical products could be imported into nearly any country on a duty-free basis. Clearly, this represents an important advance in worldwide healthcare policy, yet this important trade initiative created an unintended counterproductive effect in the form of inverted duty rate relationships in the U.S.-based production of medicines. The U.S. FTZ program provided a solution.
 
In the FTZ Board’s latest Annual Report to Congress, it was noted that receipts of products used in Zone-related pharmaceutical production ranked first among all industry sectors. Whether it was small to medium-sized contract operations such as Catalent Pharma Solutions and Patheon Softgels, or larger name-brand companies such as AbbVie and Pfizer, Zone status has contributed to the operating margins of manufacturing life-enhancing and life-saving medicines here in the U.S. Today, Zone-related pharmaceutical production activity is conducted in more than a half dozen states, including Florida, Illinois, Indiana, and North Carolina.
 
Shipbuilding
Since the passage of the Merchant Marine Act of 1920, also known as the “Jones Act,” the promotion and development of a home-grown merchant fleet has been regarded as essential to America’s economic and national security. Since its adoption, the public costs and benefits of the Jones Act have been the subject of debate. Central to this debate is the juxtaposition of the strategic benefits of mandating the construction and operation of various types of commercial vessels in the U.S. versus the costs of using vessels that might otherwise be produced more cheaply in other countries.
 
However, the utility of the U.S. FTZ program in lowering duty-related costs of building ships and maritime vessels in the U.S. is beyond debate. What’s the key benefit to using Zone procedures to build ships in the United States? The answer: relief from inverted tariffs. 
 
When considering the complexity and technology involved in producing vessels capable of both coastwise and ocean-going operation, it is easy to fathom that certain key components, systems, and technologies are produced by relatively few vendors within the global supply chain. FTZ production authority enables U.S. shipyards to construct an ever-evolving variety of vessels without passing duty costs of key imported components and systems on to their customers in the domestic maritime industry. Today, shipyards in several states, including Florida, Louisiana, Maryland, Mississippi, and Wisconsin, use the FTZ program. 
 
Clean and Renewable Energy
The FTZ program is encouraging domestic production and investment in green energy sectors. From the production of wind energy products by companies such as GE Renewables and Vestas, to the production of zero-emission fuel cells by companies such as Bloom Energy, the FTZ program encourages U.S.-based value-added activities by removing tariff costs that might otherwise serve as disincentives to developing and making these products in the U.S.
 
Cross-Sectoral Synergies
What about electric cars and automotive battery technology? What about research vessels to gather information to protect the environment and create sustainable sources of food from the oceans? The FTZ program’s use sometimes serves more than one strategic interest at a time. 
 
The race to develop automobiles without exhaust systems, and the battery technology to power them, is indeed worldwide. Not only are high-profile technology companies such as Tesla using FTZ production authority to reduce tariff-related costs in developing and producing emission-free automobiles, but more traditional names in the automotive sector such as Mercedes-Benz and Volkswagen are following suit. America’s shipbuilders have also added research vessels to their traditional menu of offerings to the American maritime fleet. These vessels are vital in gathering the data needed to develop answers to the challenges attendant to changes in the oceanic environment, and dwindling fishery stocks.
 
As the world’s technology advances, the U.S. FTZ program continues to contribute to America’s international competitiveness in other important sectors, including aerospace, chemical, electronics and more. Furthermore, through several procedural and regulatory initiatives over the past dozen years, the FTZ program has become even more streamlined in providing access to U.S.-based production operations that need to optimize their international competitiveness, add value, and maintain employment here in the U.S. T&ID
 
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